Electronics manufacturing poised for breakthrough growth

In the global Electronics Manufacturing Services space, India formed a small part of around 2.2 per cent two years ago, but it is expected to grow the fastest at 32 per cent CAGR from 2021 to 2026.

Recently, Minister of Electronics and Information Technology Ashwini Vaishnav, in a social media post, contended that 99.2 per cent of all mobile phones sold in India are ‘Made in India’ and the industry has grown 20 times in the last nine years. It is not just the manufacturing of mobile phones, but the manufacturing of electronics in general that is gaining a lot of prominence, and becoming a talking point in the last few months.

Electronics Manufacturing Services (EMS) refers to the outsourcing of the manufacturing processes of electronics components (like printed circuit boards), devices (like box builds), and equipment to specialised companies by the OEMs (Original Equipment Manufacturers). Any company involved in the EMS space could offer a variety of services like product design, testing, assembly, and repair concerning the electronic components of any device.

If we look at the global EMS space, India formed a small part of around 2.2 per cent two years ago, but it is expected to grow the fastest at 32 per cent CAGR from 2021 to 2026.

During the initial years of the industry in the early 2000s, the market evolved significantly from a few companies dominating it to numerous players co-existing and developing new products. We can see that the OEMs are now concentrating more on offering a wide range of products from smartphones, tablets, and laptops to even electric vehicles, whereas the assembly, testing, and even the design of these devices are being increasingly outsourced.

Shift of powers

Since electronic manufacturing gained prominence over the world, Asian countries such as China, South Korea, and Japan have been at the forefront of it. Two key things are necessary for the sector to thrive: Low labour costs and conducive government policies. Low-cost labour is an advantage that a country like India has to offer. With government support coming its way, a shift is starting to take place from China to India and Vietnam. The Government of India has implemented various measures to boost the EMS, reduce import reliance, and promote exports. The incentives under the PLI (Production Linked Incentives) scheme for sectors related to the EMS are as under:

We are now seeing the accretion of some of these policy measures in the form of numerous multinational companies setting up their manufacturing base in India. Google recently announced that it will manufacture Pixel phones in India in partnership with global manufacturers, beginning with Pixel 8 which will be available in the market in 2024. In addition to Google, other mobile phone manufacturers have begun producing devices in India, such as Apple and Foxconn. Apple declared in September that it would produce the iPhone 15 in India.

Has India done this in the past?

In sectors such as textiles, IT, and speciality chemicals, India has shown tremendous growth because of its low-cost advantage. The contribution of the IT sector to India's GDP, for example, rose from 1.2 per cent in 1998 to 7.5 per cent in 2023. The chemical industry’s revenue has been growing at an average rate of 15 per cent in the last five years led by the China Plus One trend during the Covid-19 pandemic.

These industries have witnessed robust growth led by export opportunities created over time in addition to the growing domestic market. India was successfully able to leverage the two aspects of labour cost and raw material availability. Similarly, the EMS segment could see a similar success considering that the government is trying to push hard to create an ecosystem where the raw material required in the entire supply chain could be indigenously procured.

Key challenges

While India aspires to replace China, it is certainly not going to be easy to match its manufacturing strength. Any company that sets it factories in India will have to contend with local policymakers, landowners, and labour unions. In contrast, labour unions are banned in China, supply chains for energy and transportation are very efficient, and are at a subsidised cost. Another challenge would be that India is a much smaller domestic market than China. As per the Morgan Stanley report, Multipolar World: Tech Supply Chains Make India the Next Stop, China has a domestic TV market of 45-50 million units per year, while India's domestic market is only 30-40 per cent as big at 15-20 million units per year. If India aspires to be an exporter, it will have to face competition in the global arena in an industry which already functions on thin margins. Another key hurdle that would need to be addressed is having an adequate talent pool that would have the expertise to work in this industry and understand the intricacies.

However, the government's focus on the sector brings along a lot of optimism and opportunities. In the last few months, various companies in the sector have gone public through an IPO such as Kaynes Technologies, Syrma SGS, Avalon Technologies, Cyient DLM, etc., and have provided retail investors an opportunity to understand, analyse, and become a part of a possible wealth creation journey.

(Parimal Ade (X: @AdeParimal) is Founder, and Gaurav Jain (X: @gaurav28jain) is Co-Founder, Investyadnya.in.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.